Several central bank digital currency (CBDC) pilots have begun kicking off around the world in recent months. China’s PBOC has already launched the digital Yuan to more than 10 million eligible citizens and is working to enable international payments across Asia. It’s also been reported that the Bank of Israel has run tests on Ethereum’s blockchain technology, even utilizing non-fungible tokens (NFTs) for real-world transactions.
As we await preliminary results from the US Federal Reserve’s digital currency tests with MIT, some policymakers have already begin to express skepticism, however, insisting that USD-pegged stablecoins already in decentralized circulation may have the answers to many questions CBDCs are meant to answer.
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Last week, the International Monetary Fund (IMF), Bank for International Settlements (BIS), and World Bank published a paper highlighting the benefits of central bank-issued digital currencies (CBDC). According to the report, “If coordinated successfully, the clean slate presented by CBDCs might – in time and in combination with other improvements – be leveraged to enhance cross border payments.”
That endorsement follows a BIS survey showing around 90% of the world’s central banks are now working on their own digital currencies, some of which may be issued in the next three years.
CBDCs have surged in popularity, corresponding with the rapid rise of Bitcoin (BTC) and other decentralized blockchain assets. According to Christine Lagarde, the head of the European Central Bank, at least 80 central banks around the world are looking at CBDC adoption.
Central Banks Could Build Out Digital Payment Plumbing
Perhaps one of the most significant blockchain developments of all time was achieved just last month when El Salvador embraced Bitcoin as legal tender. Following that news, other Latin American nations with largely unbanked populations may also be on the verge of stepping up efforts to legislate BTC’s place in their economies and the global financial ecosystem. In El Salvador, some 70% of citizens are unbanked. Not only will owning a Bitcoin wallet create an incentive to save and build wealth, millions would gain access to a secure financial ecosystem never before available to them.
In their development of CBDC networks, many central banks could look toward proliferation of digital payment and banking networks while circumventing decentralized blockchain networks, attempting to build out their own centralized digital plumbing instead. As Quartz notes, a cash-free economy would exclude the 7.1 million Americans, or 5.4% of US households, that are unbanked. Only 28% of transactions involved cash in 2020, and the COVID-19 pandemic only boosted wider adoption of cashless and contactless payment among businesses.
Per Politico, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative are aiming to publish the first stage of their work to determine whether a Fed virtual currency would work on a practical level this month — an open-source license for the most basic piece of infrastructure around creating and moving digital dollars.
Though the Fed has largely been tight-lipped about any CBDC developments thus far, some policymakers have already thrown cold water on the idea.
Fed Vice Chair for Supervision Randal Quarles, for instance, said any proposals to create a US CBDC must clear a “high bar,” and that he needs to be convinced the potential benefits would outweigh the risks. Reuters notes the Fed official said the US Dollar is already “highly digitized”, expressing skepticism that a CBDC would help to improve financial inclusion or lower financial costs. As Bloomberg reports, Quarles actually sounded quite bullish on USD-pegged stablecoins already in circulation, stating in a recent speech: “the Federal Reserve has traditionally supported responsible private-sector innovation… indeed, some stablecoins have already been structured to address them. When our concerns have been addressed, we should be saying yes to these products, rather than straining to find ways to say no.”
China and Israel Lead Groundbreaking CBDC Tests
In June, China began a long-awaited crackdown on Bitcoin mining within its borders. While they had threatened such action for the better part of a decade, the threats finally became action when 90% of Chinese miners were forced to cease operations by the Chinese government. As MRP covered last month, this move is not especially consequential for the Bitcoin network since it has automatically adjusted its mining difficulty and all of the computing capacity that was in China will simply be dispersed to other locations over time.
However, many have speculated this strong-handed action was ultimately meant to clear the way for the People’s Bank of China’s (PBOC) digital Yuan project, in development since 2014. Thus far, the first real-world trial of the Chinese CBDC has reached 10 million citizens as the PBOC has distributed ¥269 Million ($41.5 million) in digital currency. Bitcoin.com reports that selected merchants in Beijing’s Wangfujing business district, as well as the online marketplace JD.com, have started accepting digital Yuan payments.
China is already looking to establish the digital Yuan abroad…